As we enter March, many will naturally wonder whether the month will come “in like a lion” and go “out like a lamb”. As you all know, this age-old proverb is a straight forward reference to the weather and the changing of the seasons. From an investment perspective, if we consider the “lion” to be market volatility and the “lamb” to be calm, we can make a convincing argument that the “lamb” arrived early in 2019. So, what are the key themes driving this lack of market volatility? A dovish monetary policy stance from the Fed with respect to both 1) the future path of the Fed Funds rate as well as 2) quantitative tightening have enabled markets to look past weaker earnings and economic data (both domestically and abroad). Four rate hikes in 2018 coupled with a continued run off in the Fed’s balance sheet proved to be too aggressive of a path towards monetary policy normalization especially when coupled with the US/China trade war. These two factors alone contributed heavily to the current weakness in the earnings/economic data. With the Fed now singing a different tune and since the prospects for a near-term trade deal with China have reached near certain levels (at least in the market’s estimation), the market is looking ahead to better times. If the trade deal falls through, however, the increasingly docile little lamb just might get chased by that March lion.
US Equities: The S&P 500 continued its upward ascent in February, posting a nearly 3% gain and astonishing many with the veracity of the rebound from the late December lows. Some mixed messaging regarding US/China trade talks during the first week of the month caused the index to sell off and veer temporarily lower. However, and as mentioned in our overview, the news flow regarding trade improved dramatically over the balance of the month causing the S&P 500 to reclaim the all-important 200 day moving average from a technical perspective. Breaking through this technical barrier so quickly came as a surprise to many in the market (including us) since earnings /economic data releases continued to be soft and despite analysts beginning to look for a year over year decline in Q1 earnings. This price action once again proved that the market is a barometer for future (not current) earnings potential. Not to be forgotten, the VIX continued to recede with the upward move in equities during February and now resides comfortably below long-term averages.
Government Bonds: 10 Year Treasury yields spent the majority of the month below 2.7% as the power of the Fed’s words continued to dampen volatility in government bonds as well. Yield curve inversion persisted in the intermediate maturities (1s-5s) and we continue to monitor term structure for any clues regarding a future recession. Of note, the Fed may also now be paying more attention to this inversion as rumors of a reverse operation twist have begun to pop up. If employed as rumored, this action would 1) steepen the yield curve and 2) bring the Fed’s holdings (from a duration perspective) more in line with overall government bond issuance. After having closed only 5 days above the 2.7% mark all month, the persistent equity market rally allowed the 10 Year Treasury to close at 2.73% going into March. Not even traditional government bond investors want to miss out on the sharp equity move.
US Dollar: With the Fed’s new stance clearly baked into the markets, the dollar is left to trade on the US economy’s relative performance and any incremental changes in central bank policy. While decelerating, domestic economic data continues to compare favorably to the eurozone and as a result, the dollar strengthened slightly over the course of February. US Treasury / German Bund spreads continue to remain stable and firmly inside of their historic wides. The synchronized global dovishness that we noted previously continues to keep those spreads anchored. To reiterate, we continue to watch eurozone yields as they have persistently been a weight on US rates despite the economic divergence the US has experienced over the last few years. With the ECB now more dovish alongside the Fed, we still view the biggest risk to higher US Treasury yields as a rise in eurozone yields tied to ECB policy changes.
Having peaked over the $1,350 gold accelerated its decline last week as the US-China trade story appeared to be headed to resolution. Time will tell. We have been highlighting the US China trade conflict, Fed and ECB actions as key drivers of equity and USD volatility, in turn driving investor gold demand. With the progress on the trade front, equity market on the rise again, and strong USD, gold looks to be on its back foot in the very near term. However, with central bank buying at historically high levels, and the aging bull market in USD and equities, we see a base being built here in gold and the prospect of a gold bull run beginning later this year.
Gold is currently caught in a tug of war between the receding need for flight to safety assets offset by the shrinking future perceived yield differential between US Treasuries and the precious metal. As highlighted previously, no matter what type of market we are in, the yield differential between US Treasuries and gold can be narrowed further with a Precious Yield account. As we saw in February, turning gold as an asset for diversification purposes into an alternative investment with Precious Yield allows for some cushion against gold price declines. Precious Yield accounts allow investors in gold to earn interest on their holdings while leaving gold’s utility as an investment portfolio diversification tool intact. In a rising gold price environment, the interest earned in a Precious Yield account is additive to the overall return. Please see our white paper entitled The Alternatives Available for Precious Metals Investors for a more nuanced view of Precious Yield’s’ benefits.
Gold 1-Month Price Chart
Very few meaningful silver specific drivers were observable. Silver’s price action of late is an outsized reflection of that of gold. Compare the silver chart below to that of gold above to see this dynamic visually. We expect silver to continue to play its role as gold’s high beta cousin with exaggerated moves in both directions. Fundamentally, silver remains oversupplied. In our view, the bull case for silver is driven by a return of investor demand driven by the factors that drive gold as outlined above.
Silver 1-Month Price Chart
Platinum Group Metals
Palladium hit yet another all time high just over $1,560 as the physical market remains very tight. Both palladium and platinum prices were positively impacted by the continuing dispute between South African union AMCU and Sibanye. As we’ve covered regularly in this space, the concentration of PGM supply in South Africa can at times be an acute driver of price movements. This has been the case lately as AMCU filed notice to expand strikes across the PGM sector. This planned 7-day strike was later deferred pending a court decision on its legality. Platinum rose to over $875 as news of the planned action, then giving up much of its gains. The underlying conflict between AMCU and Sibanye, relating to Sibanye’s gold mining operations, remains unresolved. The South African power utility Eskom is seeing increased outages on downed power plants. Eskom has substantial financial challenges and does not have a clear path to accessing the funds needed for required maintenance and upgrades.
On the demand side of the equation, our friends at Heraeus do the market a service with their analysis of the potential impacts of a European recession on automotive demand, and by extension, PGM demand. In their analysis, Heraeus provides historical data to support their conclusions on the scale of reduced PGM demand and how palladium prices would see greater declines vs. platinum in a European recession scenario.
Platinum 1-Month Price Chart
Palladium 1-Month Price Chart
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